Home Sweet Home

A way to make people buy homes again.

Many potential homebuyers who can afford to buy are instead waiting, worried that home prices will continue to decline.

In its most recent quarterly survey, Fannie Mae reported a continuing decline in the fraction of renters and homeowners who think buying a home is a safe investment.

But there is a way to buy a home with less risk to one's hard-earned cash: a down-payment protection plan.

Down-payment protection would provide a sensible and affordable way to restore confidence. It would complement a proposal by President Obama to increase mortgage refinancings at today's low interest rates.

When combined with other economic woes, is it any wonder that so many potential buyers, especially younger adults, are renting, or living with relatives? By one recent estimate, the nation has about two million fewer households than under more normal conditions. Some of these potential buyers hesitate to take the risk of buying, even though their jobs and credit history may qualify them for mortgages. While near-record numbers of houses all over the country are empty, the sidelines are crowded with this huge "shadow demand."

Activating that demand for houses, condos, and apartments would help the sales of related goods and services, which would in turn help reduce unemployment.

Here's how down payment protection could work. Homebuyers could purchase protection from the government for a onetime fee, say 1 percent of the house purchase price, or $2,000 on a house selling for $200,000. The fee could vary with the risk of house price declines in each area. The plan would be open to all buyers.

At the end of three years, the government would automatically mail checks to protected homeowners if average house prices in their area were lower than when they purchased their homes. (No decline, no check.just like auto insurance.)

Or, the payment might be applied to the mortgage to reduce the balance due. Declines would be based on the government's houseprice indexes for nearly 400 areas in the country. Either way, without selling their homes, at the end of the third year homebuyers would be quickly and fully compensated for any loss of equity, up to the amount of their down payment.

The Federal Reserve has documented that banks' lending standards have become tighter. maybe too tight. Because lenders' risks tend to rise as house prices fall, the could also be used to encourage lenders to ease their mortgage terms a bit. In that scenario, the buyer of the house could pay for the protection and then assign it to the lender in return for easier mortgage terms, like agreeing to lower rates, fees, or down payments.

That, too, would advance the goal of allowing more borrowers to qualify and buy houses.

Only the federal government can readily offer a down-payment protection program that is large enough to raise actual and expected future house prices, which would in turn lower how much the buyer would have to pay. In addition, unlike private providers of protection, the government reaps substantial extra revenue when its policies raise national income. Even if the taxpayers provide some subsidy, to the extent that the economy does better, they would get some benefit.

Based on a scenario of two million participating home buyers, the expected net cost to taxpayers would be a few billion dollars annually, far less than some of the housing programs that have already been tried.

And, if it demonstrated the viability of the protection, the government could pass the baton to the private sector.

Having the government offer not just mortgage insurance to protect lenders, but also down-payment protection for homebuyers, could increase demand. A stronger housing sector in turn improves business for those who provide related services and products, which would create more jobs.